5 minute read
n Don’t let the fund sink
from Surveyors Journal
by Th!nk Media
DON’T LET THE FUND SINK
A WELL-PLANNED SINKING FUND HELPS THOSE IN MULTI-UNIT DEVELOPMENTS TO SPREAD THE COST OF REPLACEMENTS OVER MANY YEARS.
It was a cold, wet winter morning. My mother led me by the hand to the green-fronted post office. 5p stamps placed weekly in my savings book would in time amount to a reasonable pot. The autumn seemed far off but it did come and my father brought home his crops. We planned our holiday and my savings book was in a healthy condition, with many pages of Friesian Bull stamps in an array of neat lines. My mother said that money grows on the tree of patience.
The need to prepare for future capital expenditure can be a heavy burden, particularly for someone who has just invested in a property and depleted their savings. However, with careful planning, an understanding of the potential work needed and an accurate projected cost, this burden can be lightened. Pay a little on a regular basis into a sinking fund and the significant cost can be spread out over a number of years and thus more manageable.
FEATURE
Noel Larkin MRICS MSCSI Chartered Building Surveyor
Lifespan of building elements
I’m always surprised by just how short the expected lifespan of some building elements is, especially the mechanical and electrical installations. In most multiunit developments (MUDs), the services installations are usually relatively straightforward. But items like fire alarms, emergency lighting, lifts, water storage tanks and booster pumps reach life expectancy quickly (some within 15-20 years after installation). Roof coverings, windows and external fabric should perform better but capital cost of replacement can be great. There comes a point when the cost of maintenance becomes unsustainable. The fact that many building elements have similar lifespans and require replacement at the same time means an added strain on resources. We can predict with some certainty that there will be a high demand for capital expenditure at year 25 of a building’s life and we can accurately estimate this cost. We can then also determine just how much we need to set aside each year so that the expenditure can be managed. The problem that has existed in the past, and one that the now 10-year-old MUD Act initially set out to address, was that most owners’ management companies (OMCs) were not setting aside adequate amounts to cover future capital expenditure costs. Their immediate issue at the time of having to deal with funding repairs to legacy defects arising from the building boom, including improving fire precautions, didn’t help, and left apartment owners resistant to what they felt was throwing good money after bad. Saving is a habit, and unless taught early, it’s a hard one to acquire. Most of us like to spend now and tomorrow will look after itself. Dipping into sinking funds for routine maintenance and defect repairs defeated the purpose of the funds. Impact on value
Sinking funds can also have an impact on the value of an apartment. If a sinking fund is not well resourced then a potential purchaser is likely to be faced with increased contributions to cover the ‘lost years’ when little or no contributions were made to the fund. If a substantial capital expenditure project is proposed at, say, year 25, and the pot is empty at year 20, then you can see the issue. If such a property was being sold, should the equivalent of 20 years of contributions be deducted from the market value? This sounds plausible in theory but in practice most people look beyond this reality when buying an apartment property. The shrewd investor may look differently, however, and will establish if any capital expenditure is proposed and what level of funding is in place or will need to be levied on owners. The necessary adjustment would be made to the purchase price.
Complex and costly
We recently assisted an OMC in managing the replacement of large roof-mounted water storage tanks. The tanks were old and corroded, and well beyond their serviceable life. Our design risk assessment had identified that removal of the tank required working in a confined space in a very small water tank room on a high flat roof. The working methods and programme would need to adapt to these restrictions. The temporary replacement tank would also need to be sited at roof level and at a location that would not inhibit the removal and replacement of the existing tank. The loading placed on the flat roof by the temporary tank had to be taken into consideration. A metal support platform and temporary propping below had to be designed by a structural engineer. The cost of providing temporary parking spaces, staging areas and cranes significantly inflated the overall contract sum. Similar ancillary costs can arise for replacement of lift installations, roof recovering, fire alarm and emergency lighting updates, and the like. Disposal of waste and debris needs to be accounted for and, in some cases, you need to add the cost of dealing with asbestos-containing materials (ACMs). The cost of replacement is much greater than the initial installation cost. A building investment fund based on the original installation cost would fall well short of what’s required in reality. That’s why, in my view, the assessment of work required and the preparation of a building investment fund projection needs to be undertaken by a skilled practitioner. The Chartered Building Surveyor, with knowledge of materials, lifecycle and replacement costs, but also an understanding of the logistical challenges posed when refurbishment or replacement is needed, is best placed to offer this advice. Our experience and knowledge of working with the built environment allows a certain reliability when making budget projections. The farmer who returns to the harvest field following a long tending season, or the child delighted with the balance in their post office savings book, are good role models for the apartment owner. The habit of small regular investment amounting to a desired level in time makes unwelcome levies unnecessary but also helps to maintain your investment and the property in good condition.
Money grows on the tree of patience.
